The credit crisis has had an equally profound indirect effect on small businesses that have clients who are feeling the squeeze, too. Mark Cook owns Cook Networking, an information technology company based in the Washington, D.C. metro area. He says that clients who had been planning technology upgrades or relocations of their offices are now rethinking if this is the wisest time to do so, given rising interest rates. “Clients who were contemplating major system upgrades of hardware are now postponing these plans until a later date or canceling altogether,” says Cook. “This will significantly reduce the number of billable hours we have this fiscal year and will probably lead to a reduction in our staff.”

The problem is not likely to be alleviated anytime soon, particularly with the continued lock-up of the $2 trillion market for commercial paper, a form of debt that financial institutions rely on to raise money for short periods. The recent half-point cut in the federal funds interest rate may help a bit, but will not alter the underlying problem.

What Can be Done?
As long as small businesses continue to be dependent primarily on personal sources of capital, they will continue to suffer.

“Many small businesses don’t want to put up their home as collateral or run up their credit card balances,” notes Kim Blueher, director of lending for WESST Corp, a NM non-profit economic development organization that provides training, technical assistance and loan funds to entrepreneurs. “They want credit based upon their business operations, but traditional banks are not geared toward this type of lending.”

In the past, Small Business Administration (SBA) loans have offered some relief to small businesses. “Although, the flood of foreclosures has caused some lenders to become more risk averse, SBA loans offer a safety net for small firms trying to access the capital they need to start or expand their business,” says Senator John Kerry (D-MA), Chairman of the U.S. Senate Committee on Small Business and Entrepreneurship. “Given today’s market, the SBA and their lending partners need to promote and use these tools to keep affordable credit flowing to businesses in our communities.”

But, policy advocates point to the severe cuts in funding for SBA loans over the past six years as having exacerbated the current problem. “The credit crisis is just one more reason that the SBA core 7(a) lending program needs to be expanded and the cost of a 7(a) loan needs to be reduced,” says Hauge of Small Business California.

Others see the need for long-term structural changes. Proposals have been put forth for a securitized public-private partnership that would ensure a steady source of small business credit that would be based upon the entrepreneur’s underlying business, as opposed to his or her personal assets. “There should be more accessible alternatives aside from maxing out credit cards or taking second mortgages for entrepreneurs who want to start or expand businesses,” says Jonathan Koppell, associate professor at the Yale School of Management, who authored one of the leading proposals. “Collaboration between government and the private sector has gotten millions of American into their own homes. With risk properly managed, we can put Uncle Sam’s creditworthiness to work for American small business at almost no cost to the taxpayer.”

In the meantime, small businesses will need to find creative ways to deal with the credit crunch until it subsides or more long-term solutions are in place.

John Arensmeyer is Founder and CEO of Small Business Majority, a national small business advocacy organization.